Lawrence Henry Summers is one of the world's most eminent economists. He won the John Bates Clark Medal given every two years to the nation's best economist under 40—an award so competitive that some economists say it's as prestigious as a Nobel Prize. His fellow economists cite his work even more frequently than that of Federal Reserve Board Chairman Ben Bernanke. Summers also has more experience than any senior U.S. official in memory, including Bernanke, in dealing with the financial crises that have become the regular responsibility of Fed chairmen since the Great Depression. He started in the Reagan administration, when he was senior staff economist on the Council of Economic Advisers, then moved on to become Treasury secretary under President Clinton, and, finally, President Obama's chief economic adviser in the middle of the worst financial crisis since the 1930s. Summers holds mostly middle-of-the-road but profoundly informed views on finance that make him fairly uncontroversial as a prospective steward of the Fed's mandate, which is to control inflation, reduce unemployment, and guide economic growth.
So, on paper, Summers is a superb candidate to succeed Bernanke in a post that the brilliant 58-year-old Harvard professor has pined for since his earliest days in Washington, according to longtime associates. Obama is reportedly fond enough of Summers that he may name him in the next few weeks, passing on a chance to appoint Janet Yellen, the widely admired current vice chairwoman, who is said to be the other major contender, as the first female Fed chief in history.
And yet Summers is a very risky choice for chairman—far riskier than Yellen, who would undoubtedly win overwhelming confirmation and was recently rated the Fed's most accurate forecaster since 2009 on issues from growth to jobs to inflation.
The Federal Reserve chairman wields such enormous power, with so little accountability, that he or she is said to be the second-most-powerful person in government after the president. Decisions are habitually made in secret. The job requires a person of great personal tact, subtlety, and self-control. It requires someone who knows how to build consensus at the highest levels for the right kind of policies—someone who possesses the maturity and character to admit error and shift course when needed.
But, according to numerous accounts from those who have worked with him, Summers has often displayed the opposite attributes during his long career. Behind the scenes, he has used his power, combined with intellectual arrogance, to bully opponents into silence, even when they have been proved right. He has refused to allow his dissenters a voice at the table and adopted a policy of never admitting errors.
And Summers has made a lot of errors in the past 20 years, despite the eminence of his research. As a government official, he helped author a series of ultimately disastrous or wrongheaded policies, from his big deregulatory moves as a Clinton administration apparatchik to his too-tepid response to the Great Recession as Obama's chief economic adviser. Summers pushed a stimulus that was too meek, and, along with his chief ally, Treasury Secretary Timothy Geithner, he helped to ensure that millions of desperate mortgage-holders would stay underwater by failing to support a "cramdown" that would have allowed federal bankruptcy judges to have banks reduce mortgage balances, cut interest rates, and lengthen the terms of loans. At the same time, he supported every bailout of financial firms. All of this has left the economy still in the doldrums, five years after Lehman Brothers' 2008 collapse, and hurt the middle class. Yet in no instance has Summers ever been known to publicly acknowledge a mistake.
Wielded by a Fed chairman, those personal traits and policy attitudes are a potentially combustible mix at a time when the Federal Reserve has become, more than ever, the most powerful economic institution on earth, and when re-regulation of the global financial system is substantially in the hands of the Fed. The man whom Summers once considered a model chairman, Alan Greenspan, offers an example of the dangers of being too certain of one's views without much accountability. Back in 1994, Congress instructed the Fed to police unfair and deceptive practices related to mortgage loans. But because the chairman believed in minimal regulation, no rules were ever written; Greenspan quietly slapped down efforts by governors such as Ed Gramlich to warn him; and the Fed did little to intervene in the emerging subprime fraud.
There is no question about Summers's intellect and experience. But would he have the character, temperament, and maturity to listen to a naysayer enough to admit error and reverse course in the next crisis? His history suggests otherwise.
Nobody who has spent so much time working in government has a perfect record, but Summers has rarely shown enough humility to wonder whether his answer may not be the best one—an attitude that has led him to sideline opponents no matter the merit of their arguments. "As everybody knows, Larry is very smart, and he likes to show it," Alan Blinder, who served on Clinton's Council of Economic Advisers and later as Fed vice chair, said in an interview a few years back. And Summers's policy errors, when he's made them, have been outright catastrophic.
As deputy Treasury secretary under Robert Rubin in the mid-'90s, he dismissed those experts, such as Blinder and Nobel-winning economist Joseph Stiglitz, who wanted a more cautious opening up of global capital flows; in the years since, these rampaging tides of "hot" capital have caused asset bubbles in one economy after another, with too little institutional restraint on the part of deregulated banks. Summers famously—even brutally—fought efforts to regulate derivatives, which are essentially bets on the rise and fall of asset values and which, escalating into the multiple trillions of dollars, helped to put many financial firms at risk. And early in the Obama administration, he worked hard to marginalize a widely revered former Fed chairman, Paul Volcker, who pushed for greater financial regulation.
Summers helped midwife a major series of policy errors dating back 20 years that led directly to what many economists now believe was the worst financial crisis ever. In particular, Summers's opponents—he faces a phalanx of opposition among Democrats on the Hill—point to the Commodities Futures Modernization Act of 2000, which effectively deregulated the global market in over-the-counter derivatives and was Summers's signal achievement as Treasury secretary. The final report of the Financial Crisis Inquiry Commission convened by Congress in 2009 puts the government's failure to rein in these derivatives at "the center of the storm."
Summers has, since then, engaged in what appears to be an effort to deny or cover up these errors and posture as a champion of regulation—an act of misrepresentation that flabbergasts many former colleagues and congressional opponents. Some progressives who want tougher regulation of Wall Street, such as Democratic Sen. Maria Cantwell of Washington, say they couldn't vote for him unless they heard some kind of mea culpa. "Nobody is going to get my support unless owning up to mistakes of the past," Cantwell told the Seattle Post-Intelligencer recently. Sheila Bair, the Republican former head of the Federal Deposit Insurance Corp., and a leading proponent of greater regulation, agrees. "One of the things that bothers me about Larry is that he's never really said he made any mistakes," Bair said in a recent CNBC interview. "That worries me." Over the summer, in an unusual move, 19 Democratic senators and one independent sent Obama a letter endorsing Yellen for the Fed, meaning that a Summers nomination would probably be as tough and controversial as Chuck Hagel's was as Defense secretary.